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Time is more important than Capital

ICICI Securities 9 Mins 29 Jul 2022

What according to you is important for any investor? Is it how much you invest or is it how long you stay invested? The book – Psychology of Money explicitly says that – Time is more important than Capital.

As humans, a lot of us are psychologically programmed to react to current news and don’t tend to think long term and this is exactly why ace investors are leagues ahead of us ordinary people because they look at the bigger picture and are patient enough to let the white noise in the market- die out without any knee-jerk reactions.

Investing in equities is very similar to baking a cake. If you don’t carefully measure and select your ingredients or you take out that cake too soon, you’ll be left with a gooey half-baked mess.  It is not just about being wealthy or having a huge capital; it is also about the holding capacity to gain long-term returns.

An Equity represents a share in the company you’ve invested in and when the company grows your wealth grows with it, but you can’t expect that to happen overnight. After a company goes public and its shares begin trading on a stock exchange, the price of its stock is determined by market supply and demand. The price will rise if there is a large demand for its shares due to favorable reasons. If the company's future growth prospects do not appear promising, stock sellers can drive the price down. Therefore, Equity and Time are interrelated.

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So what is an easier yet a pocket-friendlier way to invest in equities and stay invested for the long term? A SEP (Systematic Equity Plan)!  

The Systematic Equity Plan (SEP) allows you to invest a defined amount of money or buy a set number of shares on a regular basis. Regularly adding to your portfolio enables you to take advantage of compounding and attain your financial goals. Imagine you are willing to buy a phone worth Rs. 40, 000 and you save a fixed amount of Rs. 5000 every month. Like this, by the 8th month, you will have your dream phone! Subsequently, setting up the SEP also lets you automate your equity investments thereby, eliminating your worries about every equity investment that you make.

Unlike the cash market, where you must time the market to profit, SEP uses the averaging principle to help you lower your average cost of purchasing of shares. SEP provides you with the flexibility for you to not monitor the market actively and assists in the distribution of your investment over time.

Systematic Investing empowers you to harness the power of Compounding

Compound Interest, in simpler terms, means getting an additional 5% off on an already discounted pair of shoes. Isn’t this amazing? Compound interest can be defined as an interest that an investor earns on the interest amount. This implies that any interest (or dividends) earned on your stock portfolio compounds over time, increasing the size of your account over time.

The book further says that it is not about attempting to get high interest rates when it comes to making a solid investment. Although it may seem absurd, usually, high interest rates are one-time events that cannot be reproduced. Good investment, on the other hand, is about making decent returns over a long period of time.

Numerical Illustration of how magical Compounding can be!

Let us illustrate this concept with an example of two people: one begins investing INR 1,000 at the age of 25, while the other begins at the age of 35. Assuming a rate of return of 12% compounded annually for each of them, the former will have earned INR 17.9 lakhs by the age of 50, while the latter will have accumulated only INR 5 lakhs. As a result, the sooner you begin investing, the longer you will have to benefit from compounding.

Stocks are fundamentally considered to be the core of long-term investments. This is due to the fact that equities sometimes drop 10% to 20% or more of their value in a very short course of time. To generate an exponentially great long-term return, investors can benefit from riding out some of these highs and lows for years, if not decades.

In fact, financial experts always say that “Though the history and results are no guarantee of future returns, according to the study, it is always affirmed that long-term investing in stocks, given enough time, often produces positive results.”

Those who invest in stocks can take advantage of a variety of trading tactics. Short-term trading tactics may be able to ride the market waves and generate money for investors with greater experience. However, people who are just getting started or who cannot endure too much risk may not be able to do so. Long-term stock holdings can help you ride the market's highs and lows, as well as benefit from lower tax rates and be less expensive.

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Disclaimer: ICICI Securities Ltd. (I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400 025, India, Tel No : 022 - 6807 7100. The contents herein above shall not be considered as an invitation or persuasion to trade or invest.  I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. The contents herein above are solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments or any other product. Investments in securities market are subject to market risks, read all the related documents carefully before investing. The contents herein mentioned are solely for informational and educational purpose.

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